Money Makeover: How to bridge a future gap in income

Name: Colin and Sarah Chadfield

Ages: 43 and 26

Occupations: Fire Brigade officer and Fire Brigade controller

The problem: Colin and Sarah, from North Yorkshire, have a 13-month-old son, George. Colin, who joined the service in 1981, earns about pounds 34,000 while Sarah, who joined in 1992, earns about pounds 17,000.

Both are members of their occupational pension scheme, which provides an inflation-proofed pension based on a multiple of income against their years of service. But although Colin will receive a maximum pension if he stays with the service until retirement, Sarah is contemplating reducing her hours. Another option might be to give up work temporarily to care for George.

They also have some windfall shares from Halifax and Norwich Union and an investment in a Co-op six-year bond, which should pay out any increase in the FTSE 100 index plus 25 per cent at maturity in 2000.

Their greatest concerns are how to provide for George's college education and how to bridge the income gap when Colin stops work but Sarah still has more than 20 years to her own retirement. Another issue is that of protection if either of them dies.

The adviser: Debbie Sotheran, principal at Three Counties Assurance Services, Gothic House, Barker Gate, Nottingham, NG1 1JU, 0115 2230.

The advice: Colin and Sarah both have death-in-service benefit of twice pensionable salary, with more benefits if death is attributable to injury at work, so at present there is enough life cover to ensure that the main liability, the mortgage, would be repaid.

However, over the longer term this could be affected by many factors, so I would suggest that life cover of pounds 75,000 be taken out on Colin. This would provide additional funds to enable Sarah to continue in employment and support George until he's completed his education. I would also suggest that in Sarah's case life cover of pounds 150,000 is sought, as Colin, George's carer, could be left in a vulnerable position in the event of her death.

As the chance of suffering a serious illness or injury is many times greater than death before retirement, I would recommend that critical illness cover, which pays out on diagnosis of a range of diseases, be incorporated within these arrangements. Scottish Provident offers cover, increasing each year in line with inflation, for pounds 62 per month for Colin and pounds 27 per month for Sarah.

As for saving for the future and George's education, their provision for the young boy at present is a Halifax savings account into which they put his child allowance. I'm under the impression they would like it to work harder but in order to do that I think we need a vehicle with no access before 10 years.

My recommendation is to invest the money in a maximum investment plan (MIP) - set up in joint names. Because there is an element of life cover, should the worst happen, money would still be available to George.

I would suggest using Skandia Life. It allows contributions to be varied from year to year without affecting the withdrawal of benefits free from personal tax 10 years after taking out the plan.

Child benefit is paid at pounds 11.05 per week. I would suggest rounding it up to pounds 50 per month, which would, based on a return of 10 per cent, provide a sum of pounds 14,900 when George is 16.

Their investments comprise pounds 12,000 on deposit, premium bonds to the value of pounds 700 each, a Co-op Bond worth pounds 8,000, a single company PEP with Halifax worth some pounds 4,000 and Norwich Union shares of pounds 3,500.

I would suggest they place a larger proportion of their money on deposit. They inform me that they need to keep pounds 6,000 liquid for immediate access. I would suggest shopping around for the best rates [The Independent publishes "best-buys" each week - see page 6].

As for the six-year bond, it is a joint policy, so would normally be allocated on a 50/50 basis between Colin and Sarah. The profit is only taxable if you are a higher-rate tax payer, therefore I would suggest assigning the policy to Sarah, who is not a higher-rate tax payer. They will need to get the Co-op to prepare a deed of assignment.

As for retirement planning, Colin is one of those rare species who will retire on maximum benefits with a final salary, index-linked pension.

However, to make his pension more tax efficient, I would suggest hetakes the lump sum available at retirement and purchase a temporary immediate annuity. This income is treated partly as return of capital, which is not taxable, so his income should be slightly better than if he took the full pension, all of which is taxable.

Sarah's situation is not so certain. If Sarah were to continue with the Fire Service, especially if she would be working full-time near her retirement age, it would be sensible to purchase added years to boost her pension.

This is not the case, so I would suggest she starts contributing into a PEP straight away, at least for the next two tax years. Unlike a pension, Sarah does not have to be earning to contributeand if she chose to semi retire before her pension kicked in, she could use the PEP to supplement her income.